Reputation Matters: the Business Case for the OFR

Ecco il bel discorso di Colin Farrington, direttore del CIPR, a sostegno della rendicontazione non finanziaria dopo che il Governo Blair ha rinviato sine die l'obbligo per le maggiori imprese inglesi di produrre un bilancio sostenibile.

On 28 November Gordon Brown announced that the Government would abolish the requirement that all quoted companies must publish an Operating and Financial Review', something we had all come to know and love as the OFR'. This 28 November statement from the Treasury was an unexpected announcement, made without consultation or prior hints.So what is now to be salvaged?Well first of all of course there has been another turn, not quite a U-turn.A group of NGOs, led by Friends of the Earth and all credit to them took the Government on in the courts essentially for failure of due process: and, to summarise, obliged the Government to acknowledge that it must proceed with some process of Business review', albeit in a less prescriptive and more flexible' manner.Simultaneously with the Friends of the Earth initiative, we and a coalition of 21 other professional interests published open letters in January and March stating what we believed to be the minimum required content of the new' OFR whether that is achieved by regulation, or voluntarily, or peer pressure, or whatever and to whomsoever it applies. It is essentially that list I am going to address today.Let me remind you that it is not as if the OFR' was just a casual commitment that had found its way into the Labour Party Manifesto and which could be ditched casually or manipulated into reality ,as so many manifesto commitments have to be. It was something much more serious than that. It was one of the products that had emerged from an especially lengthy and non-partisan review, that stretched from the last century, of company law. That was a review largely led by economists, accountants and company law experts from private industry, led by Rosemary Ratcliffe of Price Waterhouse Coopers. It was a review which had painstakingly issued working and consultation papers, had held endless consultation meetings -I remember those dealing with company reporting well - and had worked tirelessly to achieve a sensible consensus.It has been reported that the abandonment at least temporarily - of the OFR' was the one result of an increasingly desperate attempt to find a populist display of the Government's business credentials; an attempt to find something that appeared to be a lifting of the regulatory burden' (in itself not a bad objective and one which we should examine) and that it arose from a lunch hosted by a pension fund and attended by a senior Treasury advisor...Well, sadly, this particular announcement backfired and in my estimation is likely to have led ultimately into a cul-de-sac and after a decent interval into a rerun, no doubt using different and face-saving language, of the original policy. So in this case not only is there no such thing as a free lunch but indeed for the Exchequer and for business it was a very expensive lunch indeed.But before I return to the list of objectives let me just satisfy you on one thing. Why are public relations people involved in this at all? This is not a question which has bothered our partners. However it does seem to bother two groups of people.First, certain journalists who have referred to serious company reporting initiatives such as the OFR falling into the hands of the public relations people and spin doctors' and used as gimmicks' and trickery' designed to disguise and distract, rather than illuminate. Well that simply shows a serious and lazy lack of understanding of what public relations people call them corporate communicators if you will actually do for business. Those senior public relations people in top companies such as Diageo, Vodaphone, Tesco, etc are not mere media handlers foddering journalists with clever quotes and bits of recycled information.At those top companies, and in organisations of every type up and down the land, it is the public relations women and men (mostly women) who guard the reputation of their organisations; and to whom the OFR' is but one tool. A tool to be shared with economists and accountants. But a tool that belongs squarely in the public relations toolkit. We unashamedly lay claim to it, and in 2003 published, in conjunction with MORI and Business in the Community, a guide to the OFR, entitled Reputation and the Bottom Line'. At the risk of blatant self-promotion, it is still in print and still has much to commend it to you!And the second group who let us down? Well they I am afraid certain folks who say they work in public relations' but who would not recognise the OFR from the OECD, the NFU or OPEC or OFWAT or whatever. They come in all shapes sizes from the sort of pr girls' who hand out flyers outside Ibiza nightclubs or the pr factories' which issue template press releases and then claim a million advertising value equivalent' hits for their dumb clients. They are the embarrassing tailend of the public relations business. They attract too much attention from the media but are really the subject of another conference.Let me return to what we hope to achieve from the comprehensive business reporting expected from the OFR or some version of it&. We aim to:1. Improve company decision-making and risk management: experience shows that the process of reporting on the drivers of long-term value and risk which are most relevant to their particular company focuses the minds of senior management, and thus helps them manage actively these factors and so improve their decision-making.2. Improve investor decision-making and so foster long term value creation: by enabling investors to compare the prospects and performance of companies more accurately, this improves the financial system's focus on long-term value creation and the allocation of capital, bringing benefits for the entire economy and those who have a n exposure to it.3. Improve stakeholder communication and trust: without compromising the accountability of companies to shareholders, enhanced business reporting is fully aligned with the "enlightened shareholder value" approach and goes a long way to enabling employees, the community, regulators and all stakeholders to assess better the performance of companies on critical environmental, social and governance issues and to understand their "values in action". 4. Encourage a shift from compliance to judgement: recognising that each company is different, there is a clear need for an overall framework which offers companies the flexibility to exercise their judgement and think less in terms of an external standard for reporting, but rather to be aware of, and focus in a practical way on, the real health of their business.5. Improve the quality and range of information reported on: encouraging corporate managers to consider the totality of variables that influence corporate performance (including extra-financial factors) encourages greater use of judgement by capital markets in evaluating and comparing the prospects and performance of companies beyond traditional financial analyses.6. Encourage simplicity, brevity and reduce duplication of effort: by freeing companies to convey information with the minimum of repetition allowing them to cross-refer readers to other available information outside of the core narrative companies can create a core narrative which captures, in one place, all the key information and context that is needed for interested parties to form an overall assessment of the company.7. Encourage smarter regulation and greater market freedom: by maintaining a regime that achieves the optimum balance between minimal burden on companies and maximum market transparency and which takes into account of company size and ownership structure.3
8. Protect companies, and in particular individual directors, against inappropriate legal risks: the risk that evolution in the reporting framework may be used in opportunistic derivative suits and other unwarranted litigation is real and needs joint action.9. Accept the right of executives to decline to disclose information where it is in their competitive to do so: investors should respect this rationale and companies should not use it as an easy excuse.And one other important principle to add.
We need to prepare for international convergence: by shaping UK reporting regimes so that they are ready for the emerging model of international standards and to play a leadership role in encouraging such convergence, so that any short-term threat of competitive disadvantage to "UK plc" is quickly removed and indeed converted into a long term advantage
There is thus now a debate raging on what should replace the OFR. In contributing to that debate, it's important to recognise that many companies already meet the requirements of what was to have been the OFR and those that weren't were actively working towards it. Voluntary compliance is today a fact of life a fact which makes the Treasury's volte face all the more inexplicable.
So, from the Chartered Institute's point of view, there are four now key messages at the heart of our response to the current debate on the OFR:1. We advocate strong incentives for an active voluntary approach for company reporting, based on the framework set out in the ASB's Reporting Statement, which details the financial and non-financial matters on which a company should report. We accept that the focus should initially be on those companies that have a significant shareholder register (i.e. listed companies).We do however urge the Government to make clear that all companies should be striving to report using the framework set out in the Accounting Standards Board's Reporting Statement as a way of demonstrating that they are operating at best practice and also to be in compliance with the Business Review. This non-prescriptive approach which has also been proposed by the Association of Chartered Certified Accountants (ACCA), is non-mandatory in nature since companies will be able to make an individual choice about the content and depth of their reporting on strategic forward looking information including extra-financial factors. It will be for investors in particular, as well as users and observers of reporting, to evaluate whether this level of disclosure is adequate for their purposes, and to offer feedback to the company as appropriate. The onus will then be on companies to explain why performance on aspects which may reasonably be considered to be material for a sector are not being reported.We are not dogmatic in saying this. We accept that only time will show if this system works or needs amendment. In fact, we fully expect that fine-tuning will be needed in this area, as it is in all complex matters. The process of feedback and improvement is, after all, constant. The Government should therefore keep this framework under review.2. Second the fears that Directors have about personal liability related to honest attempts at forward looking reporting must be addressed.
We fully recognise that one important factor in the current debate about a revised scheme of enhanced business reporting is the need for a policy response to address the apparent increased threat of "derivative actions" against Directors. We acknowledge strong support in some quarters for a safe harbour' provision to address this issue, but are also fully aware of concerns with this approach and that there may be other legal approaches to provide Directors with sufficient reassurances when providing forward looking information.
We are keen to avoid a situation both there is no penalty on Directors, so that they are able casually to make assertions without reference to the truth; and also where Directors face too many penalties, and so eschew ambitious targets. We need a system which encourages ambition but always with reference to the truth the company which pledges to cut emissions by 50%, but then cuts them only by 25% should not face legal redress: Anything else would be ludicrous.
We therefore call on the DTI to clarify Directors' legal positions and liabilities as part of the Company Law Reform Bill.
3. Third the discussion paper issued by IASB on Management Commentary' offers a long-term focus and addresses concerns about an unequal playing field.There is in all this an opportunity to equip the UK with a regime of corporate accountability that is both forward-looking and pragmatic, and one that goes with the grain of developments in international practice.
There is little doubt at the moment that debate about OFR has become polarised and backward looking with entrenched positions on all sides. Aligning corporate reporting in the UK with this international process will offer the opportunity for a fresh start for all and address concerns about an unequal playing field. We therefore consider it vital that any decisions the Government takes going forward about enhanced or comprehensive business reporting terms we prefer to the vagueness of narrative reporting' be done with full awareness of future developments in reporting which will be shaped by IASB. Of course, such international efforts will be strengthened by experience of successful national projects.If such a framework were to be formulated, implemented and supported by the Government, it would indeed enable the ASB to continue the progress it has made in influencing the global reporting agenda.Finally we urge the Government to assume a leadership role by formulating policies that will harness support among those who value the well-being of a long-term and responsible "UK plc" and would be in favour of better corporate reporting as a way of improving the way the financial system in the UK functions.
As the first step in creating such a coalition, we and our partners propose a set of Principles for Reporting & Accountability which, if taken together and interpreted in a balanced manner, could be the basis for an effective constituency in favour of evolutionary reform of the system in the UK.
Given the considerable uncertainty created by the abolition of the OFR, we consider it essential that the Government re-affirms its commitment to a longer-term and more enlightened definition of shareholder value and uses the Company Law Reform Bill to ensure that reform of reporting is fully aligned with this definition.
The type of information that companies produce, and in what form they produce it, has a profound impact on the way in which shareholders use that information and a knock-on effect on the way in which capital markets play their role in i) the efficient allocation of capital and ii) discouraging the externalisation of costs on to other companies, society, the environment and future generations. Whilst the above proposals are clearly focused on the needs of long-term responsible investors, the changes that would result would go a long way towards meeting the legitimate expectations of wider stakeholders. These proposals, therefore, represent a workable solution in the short term, and address the Government's medium and long-term objectives.
What does the future hold?
We continue to lobby central Government, and to feed into their consultation on the future of the OFR and the changes to Company Law. If the Government heeds our comments, then we will work with them to make sure that the changes are practicable. If they do not introduce the changes we urge, then we will continue to make public our view that an opportunity is being missed. i.e., this is a long-term area of work for the CIPR.To summarise, from a more strategic point of view, it is clear that:" Public expectations on companies are increasing and making central what were once peripheral considerations

The role of communications and public relations within businesses has increased steadily and is set to increase further
Companies want to be ahead of the game, in reporting voluntarily on issues where they have no legal responsibility
From all this, we conclude that the OFR perhaps with another name, perhaps with less compulsion- is inevitable. And indeed welcome.
Colin Farrington, 31 March 2006Speech given at Governance and Communication Conference at Bournemouth Media School, part of Bournemouth University